Latest News - Plans To Reduce Tax Relief On Pensions Criticised

The CIPD has criticised government plans to reduce tax relief on pensions for high earners, saying they are unnecessarily bureaucratic and will reduce the popularity of pensions.

The treasury is consulting on proposals to reduce relief for those earning £150,000 or more. Under the plan, rather than receiving relief at the higher rate of tax (which is set to rise to 50 per cent in April), those earning £180,000 will get back only the basic rate of 20 per cent, while those earning between £150,000 and £180,000 will see their level of relief phased down gradually.

In its response, the CIPD raised the objection that top earners will be taxed twice – once as they pay into the pension and again when they receive it in retirement. This implies that a total tax rate of 70 per cent or more could become common.

“Our members perceive that the reduction of tax relief on contributions represents a fundamental shift in the way that pensions have been treated historically for tax purposes,” writes Charles Cotton, CIPD reward adviser, in the institute’s response. “We're concerned that this sets a dangerous precedent for future governments that will be tempted to further reduce the tax relief on pension contributions.”

A further worry is that business leaders will opt out of pensions and seek other ways of saving, undermining their commitment to maintaining company pension plans. The move may also deter top talent from wanting to be domiciled in the UK. Moreover, the proposal to taper relief for those earning between £150,000 and £180,000 creates unnecessary bureaucracy for reward professionals, argues the institute.

“The proposals to restrict pension tax relief for high earners are unfair and unworkable, and will have significant unintended consequences which will result in lower pensions for all,” concludes Cotton. “If tax relief has to be limited, we would welcome a less bureaucratic way of achieving this.”